Despite a strong recovery in the industry, top cruise stocks still trade well off their pre-pandemic highs. Many investors are interested in the leader Carnival (CCL -0.66%) since it's a familiar name in the cruise industry and might have the most to gain from continued growth in leisure travel.
Carnival is coming off a stellar quarterly update in September that showed revenue and adjusted profit exceeding expectations. This is exactly what the stock needed after falling sharply off its summer highs.
Share prices are up year to date but they are down 35% from the recent peak. The share price could return over 50% just by moving back to its 52-week high of $19.55, but the stock could have more upside looking ahead to 2025.
Carnival stock is not keeping up with soaring revenue
Carnival's business performs much better than its stock performance would suggest. Carnival reported record revenue in the most recent quarter of $6.8 billion, but the stock is still in the bargain bin.
Usually, investors can trace the problem to the company's bottom line, but Carnival's profitability can't explain the stock's steep discount either. Carnival's quarterly operating profit rocketed to $1.6 billion, nearly reaching its previous peak in 2019.
Why is Carnival stock down?
There are good reasons for the market to be skeptical. Carnival and other cruise operators are dealing with inconsistent consumer spending across the economy. Some parts of the economy (travel and other services) are doing well, while others (physical goods) are struggling. It's a symptom of high inflation forcing households to cut back on unnecessary purchases.
Carnival is exposed to a weak economy in Europe where a slower-than-expected recovery could weigh on revenue growth. However, Carnival reported that bookings with its European brands have returned to 2019 levels, while North American brands have already hit record highs.
Carnival is also facing rising fuel costs and servicing a large debt burden, which is pressuring its profitability. Carnival's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio is 12.2. This is higher than Norwegian Cruise Line Holdings' 9.9 and Royal Carribbean Cruises' 5.6. In the most recent quarter, Carnival paid $518 million in interest expense on its debt, compared to $1.07 billion in reported net income.
Even with all these factors clouding the outlook, management said it is off to a great start for 2024 bookings. Revenue growth is offsetting higher costs and driving strong growth in profits. The consensus analyst estimate has Carnival growing revenue by 13% next year, with adjusted earnings per share (EPS) reaching $0.92.
How Carnival can keep growing
Carnival should continue to benefit from consumers spending more on experiences as opposed to material goods. The growing demand for cruises is providing more revenue to offset rising fuel costs and pay down debt. Despite higher costs, management raised its full-year, net-profit expectations and projects Carnival will achieve adjusted EBITDA of between $4.1 billion and $4.2 billion.
Management also reduced Carnival's debt by nearly $4 billion from the peak in the fiscal first quarter of 2023. Further reduction of the debt will gradually reduce its interest expense and boost the bottom line.
The stock could earn a higher price-to-earnings (P/E) valuation as these risk factors become less of a concern.
CCL PE Ratio data by YCharts.
Will Carnival stock double by 2025?
Analysts project adjusted EPS to reach $1.33 in fiscal 2025 (which ends in November). For the stock to reach $26, or roughly double its current trading price, it would have to trade at a P/E ratio on 2025 EPS of 19.5.
Carnival's average P/E historically is 20, with a typical range of about 10 to 25, so doubling is certainly possible, but there are a few things to keep in mind.
A lot can happen in a year with everything that is going on in the global economy. The cruise industry is competitive, with variables like fuel costs, ticket prices, and travel demand difficult to predict in the near term.
That said, the company's recent performance and demand trends into 2024 can't be ignored. Carnival stock is cheap from a historical perspective and might be worth taking a shot with a small position.
